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chicago-politics

06/03/2014, 06:00am

SEC charges UNO with defrauding investors

Dan Mihalopoulos

The federal government alleged Monday that the clout-heavy United Neighborhood Organization defrauded bond investors by “making materially misleading statements” about charter school construction contracts involving an UNO insider.

Although the organization has agreed to settle civil charges leveled by the U.S. Securities and Exchange Commission, a federal official here said the case isn’t closed.

“We’re not done,” said Peter K.M. Chan, the SEC’s assistant regional director for the municipal securities and public pensions unit in Chicago. “With regard to other parties that may have contributed to UNO’s securities violations, the investigation continues. So charges against others, including individuals, are possible.”

Chan declined to comment on what the federal government might do next. But the SEC’s complaint filed Monday in U.S. District Court in Chicago appears to point blame squarely at Juan Rangel, who was the longtime leader of the Hispanic community group and its charter network.

Rangel was co-chairman of Mayor Rahm Emanuel’s 2011 mayoral campaign and also forged close relationships with state House Speaker Michael Madigan (D-Chicago) and many other local political leaders. Legislation sponsored by Madigan and signed by Gov. Pat Quinn in 2009 promised $98 million for new UNO schools.

The SEC’s allegations center on state-funded contracts that UNO awarded to the window company owned by a brother of Miguel d’Escoto, who was the organization’s senior vice president under Rangel.

The Chicago Sun-Times reported in February 2013 that UNO had used taxpayer funds from its state grant to pay Reflection Window, owned by Rodrigo d’Escoto, and d’Escoto Inc., the construction-management company of another d’Escoto brother.

“The Sun-Times article raised high-profile allegations that called into question UNO’s principal source of funds . . . and raised the prospect of administrative and criminal investigations,” the SEC said in the civil complaint.

While the state taxpayer dollars were pouring in, the organization’s school network borrowed more than $37.5 million from Wall Street bond investors in 2011. The statement that the UNO schools issued for potential bond investors disclosed its dealings with d’Escoto Inc. but did not mention that UNO had hired Reflection Window to contracts worth $11 million.

The SEC says bond investors should have been told about the contracts with Reflection. The terms of the state grant- believed to be the nation’s biggest subsidy for charter schools — required that UNO officials notify the state of deals that could create the appearance of a conflict of interest. They did not do that, and the state could have demanded UNO return tens of millions of dollars already spent for new schools.

“UNO would not have had the cash to repay the grants and therefore would have had to liquidate the very revenue-producing assets (i.e., its charter schools) essential for repayment of the bonds,” according to the SEC complaint.

Chicago Public Schools provide UNO’s charter network with about $50 million a year to operate the schools and repay the bonds, records show.
Federal government officials say UNO leaders have agreed to settle the civil charges by promising to never again enter into crony contracts and accepting the oversight of a federal monitor.

Left unclear is the fate of Rangel, who resigned from his $250,000-a-year job as UNO’s chief executive in December.

The SEC pointedly notes in its complaint that Rangel approved the contracts with the d’Escoto brothers’ companies and signed the statement to potential bond investors on UNO’s behalf.

The complaint also alleges Rangel made false comments during a conference call in March 2013. Seeking to reassure bond investors who expressed concern about the contracting scandal, Rangel said the state had provided “no guidelines.”

Rangel could not be reached for comment Monday.

The SEC’s Chan and a spokesman for the U.S. attorney’s office in Chicago declined comment when asked if the SEC had referred the UNO case to federal prosecutors for possible criminal charges.

UNO and its charter schools are represented in the case by Mary Pat Burns of Burke Burns & Pinelli Ltd., the law firm that also served as UNO’s counsel in the 2011 bond deal. She did not return calls.

Aides to Madigan, Quinn and Emanuel declined to comment, as did a CPS spokesman.